Timeframe or Bar Range
Timeframe is the term used to define how long the bar or candlestick last before another candlestick appears. Many traders don’t pay attention to this variable, although it plays an essential role in the performance of a system. The timeframe is really an important aspect when developing a trading system because it will define a lot of things:
- The length of the timeframe is inversely proportional to the number of trade opportunities available on a given period.
- Its Length is proportional to the time it takes to close a trade.
- It is also associated with the mean feasible profit. An hourly bar would offer a channel width much wider than a 5-minute bar.
- Since trading costs are a fixed amount on every trade (spread + slippage + commissions) timeframe length is proportional to the ratio Rewards/costs.
- It directly connects with risk. A longer timeframe needs longer stops, so we should lower our position size for the same monetary risk
The forex three basic categories
- Midterm: from 2-hour bars to a couple of days. It may be used with swing trading or similar techniques.
- Short term: From 15 minutes to 1-hour bars.
- Very short term: from seconds to 15 min-bars.
Time frames of popular strategies
- Scalping: It’s a very short-term strategy. From seconds to a few minutes to complete a trade. It usually takes less than 5 bars to complete a trade.
- Day trading: from very short-term to short-term. From minutes, up to 1-hour bars, although the most popular are 15-min, 30-min, and 1H bars. It takes from 5 minutes up to hours to complete a trade. Open trades are closed before the end of their trading session.
- Range trading Using Renko or 3-line-break charts: This type of strategy doesn’t rely on a time frame but a range breakout. So, its length depends on the range size. A small range takes less to be crossed through, while a large range may take 30 minutes or more. The most useful range will be that one that transition on average every 3-6 minutes.
Which Timeframe to Choose?
Very short time frames are not recommended. From the one hand, the market noise is very high and the timing for entries and exits is much more critical. The most crucial parameter of a trading system is profitability with low variance. Profit objectives can be easily achieved using proper position size, but over-trading in shorter time frames goes against that goal.
The other factor to consider is attention and focus. Tigh timeframes require the trader total focus minute by minute. Price action is too fast for a rest. This kind of concentration and focus is tough to maintain. Not recommended at all for a new trader, and I dare to say not to an experienced trader as well. These short timeframes are better left to bots.
If you trade noise you’ll get noise plus trading costs: A losing proposition. Instead, I think you should look for a timeframe with more signal than noise, which means longer ones.
The MT4 platform offers the trader the following bar timeframes: 1-min, 5-min, 15-min, 30-min, 1-hour, 2-hour, 4-hour, 1-day, 1-week, 1-month. Online platforms such as TradingView offers a wider range of possibilities.
1 to 15-minute timeframes is crowded by scalpers and trading EA, mostly losing money against big institutional fishers. 1-hour to 4-hour candles are used mostly by smart professionals doing intra-day and swing trading. Daily bars are employed by people who do mid-term trading, and weekly and monthly bars are mainly utilised to analyse big trends.
If you do not have time to follow the market except in the evening, I’d recommend using 2H or 4H charts because the trend takes days to develop and you can do periodic checks that won’t interfere with your daily work.
If you can follow the market for the whole session, you could use 2H and 4H charts to determine the trend and use 30min or 1H charts to catch the entry and exit signals.
Some traders use shorter timeframes for entry signals to cut risk (entries at pullbacks from the longer-timeframe trend, so the invalidation level is closer) but set their targets using the longer timeframe. That way they are really profiting from the larger swings a higher timeframe offers. This is an excellent solution to cut costs and create discipline in your trading because it forces you yo stick to your plan and wait for the profit-taking signal to show up in your longer-term timeframe.